Problems in American Democracy Part 49

5. The nature of monopoly. (Ely, _Outlines of Economics,_ chapter xii; Seager, _Principles of Economics,_ chapter xxiii.)

6. Causes of trust formation. (Van Hise, _Concentration and Control,_ pages 21-25.)

7. Purposes of trust formation. (Van Hise, _Concentration and Control,_ pages 25-31.)

8. Forms of industrial combination. (Van Hise, _Concentration and Control,_ pages 60-72.)

9. Text of the Sherman anti-trust act. (_Ripley, Trusts, Pools and Corporations,_ pages 484-485; Durand, _The Trust Problem,_ appendix i.)

10. Early Supreme Court decisions relative to the Sherman act.

(Ripley, _Trusts, Pools and Corporations,_ pages 506-549.)

11. The Sherman act in actual operation. (Hamilton, _Current Economic Problems,_ pages 433-441.)

12. The "rule of reason." (Ripley, _Trusts, Pools and Corporations,_ pages 606-702.)

13. Difficulty of regulating trusts. (Durand, _The Trust Problem,_ chapter in.)

14. Text of the Federal Trade Commission act. (Durand, The _Trust Problem,_ appendix in.)

15. Relation of the Federal Trade Commission to the courts. (_Annals,_ vol. lxiii, pages 24-36.)

16. Relation of the Federal Trade Commission to our foreign trade.

(_Annals,_ vol. lxiii, pages 67-68.)

17. Alleged advantages of trusts. (Durand, The _Trust Problem,_ chapter iv; Van Hise, _Concentration and Control,_ pages 8-21.)

18 Trust regulation in foreign countries. (Van Hise, _Concentration and Control_, chapter iv.)

19. The history of some one trust, as, for example, the American Sugar Refining Company, the United States Steel Corporation, the American Tobacco Company, or the International Harvester Company. (Consult any available literature.)

FOR CLa.s.sROOM DISCUSSION

20. What is a reasonable as opposed to an unreasonable restraint of trade?

21. How is it possible to tell when combination has resulted in monopoly?

22. To what extent is the mere size of an industrial organization an indication of monopoly?

23. Does monopoly always result in a higher price being asked for the monopolized article?

CHAPTER XXVIII

PUBLIC INTEREST IN BUSINESS: OWNERs.h.i.+P

337. BASIS OF NATURAL MONOPOLY.--The most important examples of _natural_ monopoly are found in those industries which are known as public utilities. Public utilities include gas and electric light works, waterworks, telephone and telegraph plants, and electric and steam railways.

These industries are by their very nature unsuited to the compet.i.tive system. This is chiefly because they operate under the principle of decreasing cost, that is to say, the greater the volume of business handled by a single plant, the less the cost of production per unit.

In order to serve 100,000 customers with gas, for example, it may be necessary to make an initial outlay of $90,000 in plant and supplies.

With this identical plant, however, the gas works could really manufacture gas sufficient to serve more than 100,000. If, later, the city grows and the number of customers using gas doubles, the gas works, already having its basic plant, will not have to expend another $90,000, but only, say, an additional $30,000.

This principle has the double effect of virtually prohibiting compet.i.tion and of encouraging combination. Since a street or a neighborhood can be served with water or gas more cheaply by a single plant than by several competing plants, competing plants tend to combine in order to secure the economies resulting from decreasing cost and large-scale production. On the other hand, the cost of duplicating a set of water mains or a network of street car tracks is so prohibitive as to render compet.i.tion undesirable, both from the standpoint of the utility and from the standpoint of the public.

This natural tendency toward monopoly, together with the social importance of public utilities, has given rise to a demand that businesses of this type be publicly owned. The problem of public owners.h.i.+p may be considered under two heads: first, the munic.i.p.al owners.h.i.+p of local utilities; and, second, the national owners.h.i.+p of steam railroads.

A. MUNIc.i.p.aL OWNERs.h.i.+P

338. REGULATION OF LOCAL UTILITIES.--In many American cities it was formerly the custom of the city council to confer valuable privileges upon public service corporations on terms that did not adequately safeguard the public interest. In making such grants, called franchises, city councils often permitted private corporations the free use of the streets and other public property for long periods of time or even in perpetuity.

The abuses growing out of the careless use of the franchise granting power have recently led to a more strict supervision of franchises to public service corporations. In most cities, franchises are no longer perpetual, but are limited to a definite and rather short period, say fifty years. To an increasing extent, franchises are drawn up by experts, so that the terms of the grant will safeguard the interests of the public. In many states there are now public service commissions that have the power to regulate privately owned utilities. The chief aim of such commissions is to keep informed as to the condition of the utilities, and to fix rates and charges which the commission considers fair and reasonable.

339. ARGUMENTS FOR MUNIc.i.p.aL OWNERs.h.i.+P.--Those favoring munic.i.p.al owners.h.i.+p, as opposed to regulation, declare that the conditions affecting rates change so rapidly that no public service commission can fix rates fairly or promptly. Public owners.h.i.+p would save the cost of regulation, in many cases a considerable item. It is maintained that regulation is inevitably a failure, and that in view of the social importance of public utilities, owners.h.i.+p is a logical and necessary step.

Important social gains are claimed for munic.i.p.al owners.h.i.+p. It is said that where the plan has been tried, it has promoted civic interest and has enlisted a higher type of public official. If all utilities were munic.i.p.ally owned, state legislatures and city councils would no longer be subjected to the danger of corruption by private corporations seeking franchises. If utilities were owned by the munic.i.p.ality, it is claimed, service and social welfare rather than profits would become the ideal. The public plant could afford to offer lower rates, because it would not be under the necessity of earning high profits. Finally, service could be extended into outlying or spa.r.s.ely settled districts which are now neglected by privately owned companies because of the high expense and small profits that would result from such extension.

340. ARGUMENTS AGAINST MUNIc.i.p.aL OWNDERs.h.i.+P.--Other students of the problem believe that public regulation of utilities is preferable to munic.i.p.al owners.h.i.+p. Those holding this view maintain that on the whole regulation has proved satisfactory, and that owners.h.i.+p is therefore unnecessary.

Rather than improving the public service by enlisting a higher type of public official, it is maintained, munic.i.p.al owners.h.i.+p would increase political corruption by enlarging the number of positions which would become the spoils of the political party in power. The periodic political changes resulting from frequent elections in cities would demoralize the administration of the utilities. Under our present system of government, munic.i.p.al owners.h.i.+p means a lack of centralized control, a factor which would lessen administrative responsibility and encourage inefficiency.

The opponents of munic.i.p.al owners.h.i.+p also contend that the inefficiency resulting from this form of control would increase the cost of management. This increased cost would in turn necessitate higher rates. Moreover, munic.i.p.al owners.h.i.+p might increase enormously the indebtedness of the munic.i.p.ality, since either private plants would have to be purchased, or new plants erected at public expense.

341. EXTENT OF MUNIc.i.p.aL OWNERs.h.i.+P.--Some cities have tried munic.i.p.al owners.h.i.+p and have abandoned the scheme as unworkable. In some instances this failure has been due to the inherent difficulties of the case, in other instances the inefficiency of the city administration has prevented success. In still other cities owners.h.i.+p of various utilities has proved markedly successful.

Most American cities now own their own waterworks, and about one third of them own their own gas or electric light plants. A few cities own either a part or the whole of their street railways. Munic.i.p.al owners.h.i.+p of public utilities is still in its infancy, but the movement is growing.

342. CONDITIONS OF MUNIc.i.p.aL OWNERs.h.i.+P.--Past experience indicates several mistakes to be avoided in any future consideration of the problem of munic.i.p.al owners.h.i.+p.

The terms upon which the city purchases a utility ought not to be so severe as to discourage the future development of new utilities by private enterprise.

Public owners.h.i.+p is practicable only when the utility has pa.s.sed the experimental stage, for governmental agencies cannot effectively carry on the experiments, nor a.s.sume the risks, so essential to the development of a new enterprise.

Any discussion of public owners.h.i.+p ought to include a consideration of social and political factors, as well as matters which are strictly economic.

The question of munic.i.p.al owners.h.i.+p should be decided purely on the basis of local conditions and for particular utilities. The successful owners.h.i.+p of street railways in one city does not necessarily mean that a second city may be equally successful in operating this utility. Nor does the successful administration of a gas works by one city necessarily mean that the same city can effectively administer its street railways.

B. NATIONAL OWNERs.h.i.+P OF RAILROADS

343. DEVELOPMENT OF RAILROADS IN THE UNITED STATES.--The railroad history of the United States began when the Baltimore & Ohio was opened to traffic in 1830, but until the middle of the century transportation in this country was chiefly by wagon roads, rivers, and ca.n.a.ls. After 1850 the westward expansion and the development of industry throughout the country greatly stimulated railway building.

Encouraged by lavish land grants and other bounties extended by both state and Federal governments, railroad corporations flung a network of railroads across the continent. Local roads were transformed, by extension and consolidation, into great trunk lines embracing thousands of miles. From 9,021 in 1850 our railway mileage increased to 93,267 in 1880, to 193,345 in 1900, and to approximately 260,000 in 1922.

344. THE PRINCIPLE OF DECREASING COST.--While the rapid development of American railroads has had an inestimable effect upon our national prosperity, railway development has brought with it serious evils. In order to understand the nature of these evils, let us notice that with railroads, as with munic.i.p.al utilities, the cost per unit of product or service declines with an increase in the number of units furnished.

A railroad must maintain its roadbed, depots, and terminals whether one or an hundred trains are run, and whether freight or pa.s.senger cars run empty or full. Many of the railroad's operating expenses also go on regardless of the volume of business. Thus the cost of handling units of traffic declines as the volume of that traffic increases.